China overcasts shadow on India’s jewellery manufacturing

After losing the number one position as the world’s largest consumers of gold to China in 2013, India could also loose out in gold jewellery manufacturing to China as Asia’s largest economy has embarked on major policy reforms to make it an important gold manufacturing and trading centre in the world.  

At a media briefing in Mumbai the World Gold Council (WGC) warned that India risks losing gold jewellery manufacturers to China if the Indian government continued to keep curbs on gold imports.

“Markets are abuzz with the possibility of India’s jewellery manufacturers shifting their bases to China as they have managed to put in place strong institutional mechanisms to enable trading and manufacturing of gold. If India continues to constrain the industry with import curbs and does not invest in skill development and build institutional mechanisms as China did, we could slowly loose our manufacturing base to China,” said P.R.Somasundaram, managing director, World Gold Council.

Report on Chinese gold market

Somasundaram made the comments as the WGC released a new report on the Chinese gold market which highlights the country’s emergence as the largest consumer in the world of gold. “Given the appreciating renminbi and $7.5 trillion of bank deposits (in China), as against India’s depreciating rupee and $1.2 trillion of bank deposits, gold demand in China is likely to remain robust, and almost similar to India,” Somasundaram said.

China’s gold demand has quadrupled in a decade, putting it in the top consumer spot ahead of India with strong demand in sight. The WGC predicted continued growth in coming years driven by China’s growing middle class. He also highlighted gold was a major contributor to India’s current account deficit (CAD), “by curbing gold imports, India has opened unofficial channels for meeting consumers’ appetite. Through curb on gold imports, India has lost (valuable) tax income.”

Although the cost of manufacturing in both the nations “works out the same,” Somasundaram noted, “China has a long term gold import policy, which India currently does not have. In fact, a number of Indian companies have lined up massive investment plans in China for manufacturing and exports of gold ornaments. They are just looking for more policy reforms in China, and a revival in global jewellery demand.”

Indian gold market remains unregulated

While 60 per cent of the gold jewellery market in India remains unregulated, the Chinese government regulates the entire gold jewellery industry through the Shanghai Gold Exchange (SGE). There are over five lakh gold retail jewellers in India as compared to one lakh jewellers in China. The SGE now plans to launch an international board or trading platform in the newly established Shanghai Free Trade Zone.

This will provide a platform for overseas investors to trade its products and for launch of new products.  He said that the Chinese were also able to establish an organised supply chain system. “The annual production of gold from Chinese gold mines now stands at 437 tonnes. Three decades back, it was just 10 tonnes.” In comparison India’s annual gold production has remained stagnant at 1.5-2 tonne.

China has also granted a licence to two large banks – HSBC and ANZ – to import gold and ensure supply at the free trade zone. The nation also has 600 operating mines and produced around 437 tonnes of gold last year. As to whether India could regain its position as the largest gold consumer if curbs were lifted by the new government, Somasundaram asserted that there did not exist a stated policy in India to enable the country to leap frog to the top slot.

The Reserve Bank of India (RBI) regulates only 40% of the gold market in terms of import and export, while the remaining 60% remains unregulated. “While the RBI controls 40% of the trade that happens in the banking sector, there is no clear cut policy to boost bullion trade,” Somasundaram said.

Moreover, with over 500,000 plus registered Indian jewellers not coming under the direct purview of the RBI, there could be no certainty in their claims of the purity of gold that they sell to consumers, he noted. In comparison the Chinese government regulates the entire jewellery market, and over 100,000 jewellers deliver pure gold to their consumers. Somasundaram noted this was all the more important since China opened its gold market only early 2000, while India opened its market in the 1990s.

The MD said that the government of China had also permitted trade in paper gold by allowing three gold exchange traded funds, in addition to the announcement of free trade zones for gold jewellery manufacturing. “China has stepped up its efforts to make the country a price-setter. Its futures market, the Shanghai Futures Exchange, has flourished with its gold trade. Though the current gold holding with Chinese banks has declined to 1% of foreign currency reserves at present from the 2% in 2009, assuming that forex reserves go to 2%, one cannot even imagine what will happen to China’s gold demand,” said Somasundaram. China also launched a gold accumulation plan, similar to the one offered to jewellers in India.